With the smoke, mirrors, and laser light show surrounding the Facebook (FB) IPO finally clearing, we are left with a $91 billion corporation trading at $31 per share. As I opined last month in this article, Facebook IPO: Thanks but No Thanks, it was inevitable that only fat cat bankers at Morgan Stanley (MS), J.P. Morgan (JPM), and Goldman Sachs (GS) would label the Facebook IPO as a "success." And by "success," I am describing a situation where sheep-like mania had Facebook shares immediately gap up to $45 from $38 at the opening bell, only to crash and burn towards $30 over the next 72 hours. At the top, insiders cashed out and got rich, while naïve retail investors bought in to a proverbial toxic waste dump of weak assets.
And where do we go from here?
Ironically, I feel that the very same comparisons to Google (GOOG) that got us to this point are the very same analytics that will drive Facebook shares towards zero. In the buildup to the largest IPO since Google, traders were hell bent upon another mission to discover our latest Golden Goose within the Web 2.0 space - to the point of hysteria. As the fallout from investor losses degenerates into a spectacle of mud slinging lawsuits, however, it is beyond obvious that Facebook is no Google.
The Initial Public Offering
The Facebook IPO, it seems, has held our attention for several months, if not years. Facebook, with its humble beginnings as Mark Zuckerberg's 2003 Harvard dorm room pet project to meet chicks, has emerged as the world's leading social media empire for friendly banter, online gaming, dating and relationships, and political canvassing.
Today, Facebook has become a part of our respective regular routine, as evidenced by its standing army of 901 million active registered users. While Facebook amassed such impressive manpower, we are effectively ordered to sign on, follow, and "like" the social media Revolution. Propaganda, of course, has further burnished the pre-IPO Facebook brand as a can't miss prospect, as we have all been [mis]treated to a relentless parade of movie titles, puff piece magazine articles, and Oprah Winfrey sit-downs.
Facebook, as you hipsters would say, went viral. On Wall Street, however, going viral is not exactly a good thing. A stock that goes viral, to the point where it is the latest can't miss hot tip of cab drivers and bus boys is likely to be a bubble. For new Facebook shareholders, the party was over before it even got started. The Facebook bubble burst immediately after this thing went public, when shares peaked at $45, before bulls got routed, and the price collapsed right back to the $38 offering price that very same trading session.
At this rate, Facebook is well on the road to aping the Pandora story. Pandora shares climaxed on their first day of trading at $26, only to get dumped unceremoniously over the next year to $8. Pandora, like Facebook, is another example of an idea that is wildly popular with consumers, but failed to monetize.
Contrary to Facebook mania, the Larry Page - Sergey Brin Google guys caught many of us off-guard. Our favorite "Do no Evil" duo had created what appeared to be on the surface, a simple website to search the Internet. Pre-IPO, we simply wrote off Eric Schmidt as effectively the head of a daycare facility, who was hired to restore order to an Animal House atmosphere, rather than an astute businessman. At the time, in 2004, an awkward Playboy interview alongside talks for a Byzantine Dutch Auction IPO, galvanized cynicism that a bunch of overmatched yahoos had gerrymandered this whole Google operation.
Google, of course, was to debut at $85 on August 19, 2004, before steadily climbing towards today's $590 share price, and near total domination of the market for search. Like clock work, story stocks often climb a wall of worry before launching themselves into the stratosphere.
The Internet Business Model
All online businesses begin with the underlying goal of attracting traffic. To do so, webmasters create communities and services that foster dialogue and problem solving solutions for a select user base. From there, the website can either sell space to third-party advertisers that market their services to visitors, or the site can set up shop as its own retail outlet and hawk goods directly to consumers.
As competing online businesses, it is logical for Google's search engine model to be more so in line with the idiosyncrasies of consumer demand, relative to Facebook's social media platform. From the privacy of our own Google search bar, we are forced to explore the depths of our innermost desires. The Google search bar is the ultimate test of the human id, where we can research the most taboo of subjects, which would include human sexuality, religion, race, and political dogma. As consumers, even our repressed greed for the material is allowed to flourish and monetize itself as profits for Google and third-party advertisers.
For example, a high school custodian may dream of the day when he can afford to purchase a $60,000 BMW M3. While searching for M3 specifications through Google, of course, our working class gentleman comes across online advertising for a local BMW dealership. From there, this man decides to arrange an appointment to line up financing to own a used 2005 BMW 325i that is well within his budget.
Facebook, on the contrary, is a public relations firm by its very nature. Facebook's army of 901 million active users realizes that on some level, everybody is watching. And by everybody, we must include an awkward mix of childhood friends, co-workers, law enforcement officials, ex-girlfriends, and grandpa on your buddy list. That being said, it is inevitable for the majority of Facebook profiles to err on the side of caution and project a neutral, vanilla image. As we all hide behind our masks of politically correct behavior, it will be all but impossible for advertising dollars to hone in upon our true passions.
Facebook will never know who many of us truly are - behind closed doors. Ironically, the very same personalized profile images that enrich the Facebook experience also provide ample justification to force our collective id underground and bury itself amid the anonymous Internet wasteland.
The Bottom Line
Facebook's profit growth is already decelerating. Limited S-1 registration statement data reports Facebook net income of $229 million, $606 million, and $1 billion between 2009 and 2011. In Q1 2012, Facebook posted $205 million in profits, which is down from $233 million net income in the year-over-year quarter. Granted, Facebook's numbers do look good on a nominal basis. A $90 billion corporation that trades at 75 times earnings as a growth story, however, cannot afford anything less than sustained, hyper-growth.
Mark Zuckerberg is already learning his lesson the hard way. Going forward, Zuckerberg can expect his business reputation, Facebook stock price, and consequently, his net worth to be shellacked further by any earnings "miss." In Wall Street parlance, Facebook's failure to meet its obscene quarterly profit projections and whisper numbers is a miss that will result in disaster for shareholders. When Facebook fails to resume hyper-growth and effectively monetize its website to meet valuations, it is inevitable that this overpriced stock will collapse towards zero.
Alternatively, Google is a story stock. On the ride up to $590, Google has blown through earnings projections, as it continues to dominate and nearly monopolize the search market. Google trades for 19 times earnings, although the corporation is averaging 33-percent net income growth over the past three years. At these levels, Google is a reasonably priced stock, if it can continue to demonstrate solid earnings power. Google, alongside Apple (AAPL), is a model company for Web 2.0 execution and shareholder returns.
Facebook, however, will never join this Web 2.0 party. Unfortunately for naïve investors, it is only a matter of time before Wall Street to realize that Facebook is no Google, and order us all to dump shares into oblivion. Next year, we will forget about this whole charade, kiss, and make-up.
Maybe Twitter is the next big thing.
Disclosure: I am long AAPL.